China to ramp up measures for corporate deleveraging

China will continue with the deleveraging of enterprises by promoting market-based debt-to-equity swaps to rein in debt risks, according to a decision at a State Council executive meeting chaired by Premier Li Keqiang on Wednesday.

The deleveraging of State-owned enterprises will be the high priority, supported with further measures like the SOE reform, cutting excess capacity and lowering cost, according to the decision.

The channels for private capital to be turned into equity investment will be expanded, and equity investment institutions will be encouraged to take part in the market-driven debt-for-equity programs.

"The debt-to-equity swap deserves much credit for reversing the fast rise of debt and bringing about a decline in the overall leverage ratio. It has been a market-driven, rules-based process, which has worked well so far," Li said.

Figures from the National Bureau of Statistics show that by the end of 2017, the debt-to-asset ratio of industrial enterprises with annual business revenues at or above 20 million yuan has dropped 0.6 percentage point year on year to 55.5 percent. The figure for State-controlled enterprises for the same period was down by 0.9 percentage point to 60.4 percent.

The National Development and Reform Commission announced last August that the agencies enforcing debt-to-equity swaps have reached agreements according to market principles with 70-plus highly leveraged companies in the steel, coal, chemical and equipment manufacturing industries, with a total contractual value of more than 1 trillion yuan.

According to a decision at the meeting, the SOEs will be required to improve corporate governance and introduce a debt control mechanism. Their efforts to replenish capital including through additional share offering and introducing strategic investors will be supported. The mixed ownership reform will be pushed forward.

Measures to raise stable, low-cost equity investment funds for the medium and long run will be brought forward, as well as those to set up private equity funds targeting debt-to-equity swaps. The capital market will be given a greater role in the merging, restructuring and optimizing of capital stock. A plan to conduct equity-swap transactions through the multilevel capital market will also be worked out.

The agencies that enforce the debt-to-equity swaps will be reinforced. Financial institutions will be guided to conduct the swaps through existing agencies and state-capital investment companies in a market-based manner. Eligible banks and insurance agencies will be supported in setting up new enforcement bodies. And asset management companies will be encouraged to strengthen their capital positions.

The debt restructuring policies for enterprises will be improved, and a bankruptcy mechanism for affiliated enterprises will be established. The cost of zombie companies going bankrupt will be borne through a cost-sharing mechanism between the government, enterprises and banks.

"Related government departments should fulfill their responsibilities and make concerted efforts to create an enabling environment and see the debt-to-equity swap agreements through," the premier said.

According to a decision at the meeting, targeted guidelines will be issued to improve the quality of debt-to-equity programs. Debt-to-equity swap agreements that were already signed will be urged to be put into practice at an earlier date to reduce the corporate debt ratio.

"We must always act cautiously and push forward implementation by category to make sure that these swap programs truly deliver," Li said.